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California could net $1bn from Amazon and other e-tailers with new tax law

A new tax bill has been passed in California that could see more than $1bn a year in extra taxes collected from sales made online.

The bill was passed by the lower house of the Legislature yesterday, and it will now progress to the state Senate for consideration. If it passes this next stage, it will close a legal loophole that has thus far enabled online companies such as Amazon.com to avoid collecting sales taxes.

This bill has massive implications for online retailers. It has long been argued by companies with physical retail outlets – such as Walmart and Best Buy – that they are at an unfair disadvantage because they are obliged to collect taxes on products sold from their bricks-and-mortar stores.

Amazon and other online retailers have traditionally been exempt from collecting sales taxes given that they don’t have a physical presence in the state. This bill reinterprets Californian law, and means that related or affiliated companies would count as having a presence there – and in Amazon’s case, it does work with a company in California that produces its Kindle e-Book readers.

Amazon – and other online retailers – have threatened to pull some of their business from California if the bill was passed. But two more bills waiting to be passed in the Internet-sales tax package could still see online retailers paying more tax in California regardless.

One of those bills would require Amazon and other e-tailers to collect sales taxes when they do business through affiliates based in California – so that would be anyone who earns commission for referring business through links on their website.

And if the third bill is passed, this will give tax collection agencies in California more power to broadly interpret laws to include out-of-state electronic retailers. What exactly this would involve isn’t clear, but it seems even the loosest of affiliations with an online retailer elsewhere in the country could see California attempting to draw in more tax.

Whether Amazon and others jump ship and build business partnerships with companies elsewhere in the US – or abroad – remains to be seen. But it does seem that a rather unfair loophole in sales tax legislation has come to an end in at least one US state. Will others follow?